Supercharged Super Budget

Last night the Federal Government handed down its Budget for the 2021-22 financial year and what a budget! Seldom has there been a budget that provides the opportunity for superannuation planning like this one. Too bad we will have to wait until the 2022-2023 year for the exciting stuff but at least we know it’s most likely coming.

Some of the key Budget announcements that may be of particular interest to you include:

• the removal of the work test for non-concessional and salary sacrifice contributions
• a reduction in the minimum age requirement for downsizer contributions
• an increase in the amount of super savings available to first home buyers
• additional investment into aged care following a Royal Commission into the quality and safety of the system.

The work test, that currently has the requirement for an individual to work for 40 hours in 30 consecutive days to be able to contribute to super, will be abolished. This means that anyone under the age of 75 will be able to make personal concessional and non-concessional contributions irrespective of their employment situation. That’s great news for our valued clients who are over age 65, who have been restricted in being able to contribute to Superannuation.

The non-concessional bring forward provisions, currently available up to age 65, will be extended to the under 75s as well – subject to the usual caps of course.
Downsizer contribution age eligibility will be reduced from those over 65 to those over 60. The Downsizer contribution allows an after-tax contribution of up to $300,000 per person when they sell their family home.

A 68-year-old individual who has missed the super boat and is largely invested personally will have the opportunity to make concessional (Personal) contributions, immediately available as unrestricted non-preserved monies, to wipe out personal tax. Selling investment assets and moving the proceeds into superannuation may now be an option with the availability of unused concessional contributions to offset capital gains tax and the availability of the Non-Concessional Contribution bring forward provisions.

The budget has been favourable to people over the age of 65, who want to contribute more money into the Superannuation system, however, we must wait for the actual legislation to be passed and receive Royal Assent. It is, therefore, expected that these measures will not be operational until they are passed by Parliament and become law and most likely not effective until 1 July 2022. We will Keep our fingers crossed.

Here is a summary of all the proposals:

Repealing the work test for non-concessional contributions and salary sacrifice contributions for people aged 67 to 74

Expected to be 1 July 2022

The Government has announced it will allow individuals aged 67 to 74 to make or receive non-concessional (including under the bring-forward rule) or salary sacrifice superannuation contributions without meeting the work test, subject to existing contribution caps.

However, individuals aged 67 to 74 years wanting to make personal deductible contributions will still have to meet the existing work test.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government stated it expects this to occur prior to 1 July 2022.

Reducing the eligibility age for downsizer contributions to 60

Expected to be 1 July 2022

The Government has announced it intends to reduce the eligibility age to make a downsizer contribution from 65 to 60 years of age.

The downsizer contribution rules allow people to make a one-off after-tax contribution to super of up to $300,000 from the proceeds of selling their home they have held for at least 10 years. Under the rules, both members of a couple can make downsizer contributions for the same home and the contributions do not count towards a member’s non-concessional contribution cap.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.

Explained

Removing the work test for people aged 67-74 to make non-concessional contributions will provide more flexibility for retirees under 75 to top up their super without needing to work 40 hours within 30 consecutive days in a year prior to making a contribution. It will also allow advisers to implement strategies, such as the re-contribution strategy, that are not normally available to retired clients in this age group.

The removal of the work test to allow salary sacrifice contributions to be made on behalf of people in this age group also means funds will be able to automatically accept these contributions without needing to first confirm the member has satisfied the work test. It also means that members in this age group can have salary sacrifice contributions made on their behalf in the first week of a financial year.

The bring-forward rule and removal of the work test

In its announcement, the Government confirmed that people aged 67-74 making non- concessional contributions will still be subject to existing contribution caps.

Therefore, a client who was under age 67 at the start of the year and has since turned 67 will be able to make a non-concessional contribution of up to $110,000 without first needing to satisfy the work test (or up to $330,000 under a proposal to extend the bring-forward rule to people under age 67 that is yet to be legislated).

First Home Super Saver Scheme – increasing the maximum releasable amount to $50,000

Expected to be 1 July 2022

The Government has announced it will increase the maximum releasable amount for the First Home Super Saver Scheme (FHSSS) from $30,000 to $50,000.

Under the existing FHSSS rules, an eligible person can only apply to have up to $30,000 of their eligible (voluntary) contributions, plus a deemed earnings amount, released from super to purchase their first home.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.

Explained

Reducing the eligibility age for downsizer contributions to age 60 could allow an eligible couple in their early sixties to sell their home and contribute up to $1.26m to super in a year by each making a $300,000 downsizer contribution and $330,000 non-concessional contribution.

Alternatively, where a client wants to contribute a much smaller amount, it will be important for an adviser to consider what type of contribution they should make in order to maximise their ability to make contributions in future.

For example, if a client in their early sixties has $300,000 from the sale of a home they want to contribute to super, they may be better off making a $300,000 non-concessional contribution under the bring-forward rule rather than a downsizer contribution, as this would then preserve their ability to make a downsizer contribution in future.

Removing the $450 per month minimum superannuation guarantee threshold

Expected to be 1 July 2022

The Government has announced it intends to remove the $450 per month minimum superannuation guarantee (SG) income threshold.

Under the current rules, an employer is not required to pay superannuation guarantee contributions for an employee who earns less than $450 per month.

This measure is proposed to have effect from the start of the first financial year after the enabling legislation receives Royal Assent. The Government has stated that it expects this to occur prior to 1 July 2022.

Explained

Considering that two out of every three part-time workers are female, the SG threshold disproportionately impacts women who do a small amount of paid work, or who work multiple jobs each paying less than $450 per month. Younger workers combining part-time employment with full-time university study are also in the same situation.

Abolishing the $450 per month threshold could therefore help younger workers over age 18 to start accumulating superannuation earlier as well as help address the gap in super savings between women and men.

For example, abolishing the threshold could give a female worker at age 30 who drops down to one part-time employment arrangement due to family caring responsibilities up to an extra $6,924 in super at age 40. This difference will then continue to grow over time due to compounding investment returns, increasing to $11,700 in today’s dollars by retirement at age 67*.

*Assumptions: Results are in today’s dollars and calculated using ASIC Moneysmart superannuation calculator with the default assumptions applied. Assumes a 30-year-old with a super balance of $50,000 drops down to part-time employment earning $449 per month for 10 years. Assumed age of retirement is 67 years of age.

Complying pension and annuity conversions

Effective first financial year following Royal Assent

The Government has announced people with certain complying income stream products will be given a two-year window to commute and transfer the capital supporting their income stream (including any reserves) back into a superannuation account in the accumulation phase. The member can then decide whether to commence a new account-based pension, take a lump sum benefit or retain the balance in the accumulation account.

The income streams affected by this measure include:

• market-linked income streams (otherwise known as Term Allocated Pensions),
• complying life expectancy income streams and
• complying lifetime income streams, that were first commenced prior to 20 September 2007 from any provider, including self-managed superannuation funds (SMSFs).

Under the measure, any commuted reserves will not be counted towards an individual’s concessional contributions cap but they will be taxed as an assessable contribution of the fund.

When commuted, any social security treatment the product carries such as 100% or 50% asset test exemption and/or grandfathering for income test purposes will cease.

However, the Government has confirmed there will be no re-assessment of the social security treatment the product received prior to the commutation. Therefore, the member would not be required to pay back any overpaid entitlements.

The Government has also confirmed the existing transfer balance cap rules will continue to apply. Therefore, on commutation, the member will receive a debit in their transfer balance account based on the debit value method that applies.

Income streams not included in this measure include flexi-pensions offered by any provider and lifetime products offered by a large APRA-regulated defined benefit scheme (eg some older corporate funds) or public sector defined benefit scheme (eg CSS, PSS).

Comment

The Fact Sheet ‘Superannuation – More Flexibility for Older Australians’ states the products covered as those that first commenced prior to 20 September 2007. This appears to include those products that have since been commuted and rolled over to commence a new complying product.

How the value of the reserves of life expectancy or lifetime products will be calculated for the purposes of determining the assessable contribution to the fund remains to be seen and will be an important consideration for larger balances.

It will be important for members to consider the effect of commutations and commencement of new income streams on their transfer balance account. Often the debit on the commutation of a complying income stream is well below the actual capital that is released. Members and trustees will need advice in this complex area.

This is particularly good news for trustees of SMSFs that hold these products where balances  have been depleted to the point of making the expenses to administer the fund unviable.

Relaxing residency requirements for SMSFs and Small APRA Funds (SAFs)

Expected date 1 July 2022

The Government plans to relax the residency requirements for SMSFs by extending the central management and control test from 2 to 5 years and removing the active member test.

Under current rules, SMSF trustees living overseas who intend to return to Australia at some point can be away for a period of up to two years and the fund will still meet the central management and control test. Under the proposal, the trustee will be able to be away for up to five years and still meet the test.

Further, the active member test will be abolished. Under this test, if the fund had members that were ‘active’ by making contributions or rollovers into the fund, the residency status of the fund could be jeopardised. This means that members who are overseas for a period of time often cannot make contributions to their SMSF or SAF. In contrast, a non-resident can contribute to large APRA and industry funds without putting the fund’s residency status at risk.

Abolishing the active member test simplifies the rules and ensures that members and trustees who are temporarily overseas can continue to make contributions to their SMSF or SAF without jeopardising the fund’s complying status.

Comment

Under the central management and control test, SMSFs trustees must only intend to move overseas on a temporary basis. If the trustees move away permanently with no intent to return, the current 2 year period (and the proposed 5 year period) will not apply and the SMSF will become a non-resident (and hence non-complying) fund immediately.

Early release of super for victims of family and domestic violence

Not proceeding

In the 2018 Women’s Economic Security Statement the Minister for Women, the Hon Kelly O’Dwyer MP, announced that the Government planned to extend the ability to access early release of superannuation to victims of family and domestic violence.

The Government confirms that this proposal will not be proceeding.